ECON107
Principles of
Microeconomics
Week 2
FEB 2014
Chapter-1
1
Dr. Mazharul Islam
2
Lesson Objectives
 Define
economics and distinguish between
microeconomics and macroeconomics.
 Explain
the two big questions of economics.
 Explain
the key ideas that define the
economic way of thinking.
 Explain
how economists go about their work
as social scientists and policy advisers
Dr. Mazharul Islam
3
4
Definition of Economics
Economics
is the social science
concern that studies of how individuals,
businesses, governments, and entire
societies use their scarce resources to
satisfy their unlimited wants.
Economics divides in two main parts:
 Microeconomics
 Macroeconomics
Dr. Mazharul Islam
5
Definition of Economics
Microeconomics
is the study that
deals with an individual industry, firm
or household. It means it talk about
individual decision maker.
An example of a microeconomic
question is: Why is Dr.Islam buying
more e-books and fewer hard copy
books?
Dr. Mazharul Islam
6
Definition of Economics
Macroeconomics
is a study that
examine the economy as a whole. It
means that it is concerned with the
overall
performance
of
the
economy.
An example of a macroeconomic
question is: Why is the women
unemployment rate in the Kingdom
of Saudi Arabia so high?
Dr. Mazharul Islam
7
Key Tools and Terms of Economics
ECONOMIC
PROBLEM
Basic economic problem is
wants are virtually unlimited
while the resources available to
satisfy these wants are scarce.
Dr. Mazharul Islam
8
Key Tools and Terms of Economics
SCARCITY
Lack of enough resources to satisfy our
all desired uses of those resources.
Resource are scarce when they are not
freely available  alternatively we can
say when its price exceeds zero. Since
human and property resources are
scarce, it follows that the goods and
services we produce must also be
limited.
Dr. Mazharul Islam
9
Key Tools and Terms of Economics
CHOICE
Due to scarcity, we can’t have all that we
want. We must decide what we will have, and
what we must forgo. That is why we make
choices.
Goods
 Tangible
items
 Require scarce resources
 Satisfy human wants
Services
 Intangible
items
 Require scarce resources
 Satisfy human wants
Dr. Mazharul Islam
10
Two Big Economic Questions
 Two
big questions summarize the
scope of economics:
 How do choices end up determining
what, how, and for whom goods and
services get produced?
 When do choices made in the pursuit
of self-interest also promote the social
interest?
Dr. Mazharul Islam
11
Two Big Economic Questions
What,
How, and For Whom?
Goods and services are the things that
people value and produce to satisfy
human wants.
 What?
In 2011, Agriculture accounts for 2% of
total Saudi Arabian production, Industry
goods for 69.1%, and Services for 28.9%
(Source:
Central Intelligence Agency
(CIA) World Factbook 2012).
Dr. Mazharul Islam
12
Two Big Economic Questions
How?
Goods and services are produced by using
productive resources that economists call
factors of production.
 Factors of production are grouped into
four categories:
 Land
 Labor
 Capital
 Entrepreneurial Ability
Dr. Mazharul Islam
13
Two Big Economic Questions
LAND
It does not refer only a plots of ground but also
includes all other natural resources such as crude
oil, water, air, and minerals etc. that we use to
produce goods and services
LABOR
It is not simply the number of human bodies but it
refers to the work time and work effort that people
devote to producing goods and services. It
categorized into two parts– physical and mental
(9.56 millions out of 26.53 millions in 2010 where about 80% of the labor
force is non-national - Source: CIA World Factbook 2012).
Dr. Mazharul Islam
14
Two Big Economic Questions
CAPITAL
In economics the term capital refers to final goods
produced for use in further production. It also
categorized into two parts. These are:
 Physical capital: factories, machines, tools,
buildings, airports, highways and other
manufactured items employed to produce
goods and services.
 Human capital: consists of the knowledge and
skill people acquire to enhance their labor
productivity.
Dr. Mazharul Islam
15
Two Big Economic Questions
ENTREPRENEURIAL ABILITY
 Special kind of human skill
 Talent required to dream up a new product or
find a better way to produce an existing one.
Dr. Mazharul Islam
16
Two Big Economic Questions
For
Whom?
Who gets the goods and services
depends on the incomes that people
earn.
 Land earns rent.
 Labor earns wages.
 Capital earns interest.
 Entrepreneurial ability earns profit.
Dr. Mazharul Islam
17
Two Big Economic Questions
Self-Interest
People always try to make the best
choices they can, given the available
information. Moreover, Individuals try to
maximize the expected benefit achieved
with a given cost or minimize the expected
cost of achieving a given benefit. Peoples
allocate their time, energy, and money to
maximize it.
Dr. Mazharul Islam
18
Two Big Economic Questions
Social
Interest
Choices that are best for society as a
whole are said to be in the social
interest. Social interest has two
dimensions:
 Efficiency
 Equity
Dr. Mazharul Islam
19
Two Big Economic Questions
Efficiency
and Social Interest
Resource use is efficient if it is not
possible to make someone better off
without making someone else worse off.
Equity
and Social Interest
Equity is fairness. The idea that the
social interest requires “fair shares” is a
deeply held one.
Dr. Mazharul Islam
20
The Economic Way of Thinking
Six key ideas define the economic way of
thinking:
 A choice is a tradeoff.
 People make rational
choices
by
comparing benefits and costs.
 Benefit is what you gain from something.
 Cost is what you must give up to get
something.
 Most choices are made based on “howmuch” at the margin.
 Choices respond to incentives.
Dr. Mazharul Islam
21
Economics: A Social Science and
Policy Tool
 Economics
as Social Science
Economists distinguish between two types of
statement:
 What is —positive statements
 What is —normative statements
 Positive economic statement
Absolute
Facts.
A
statement
about
economic reality that can be supported or
rejected by test.
Dr. Mazharul Islam
22
Economics: A Social Science and
Policy Tool
 Normative
economic statement
What Ought to be
 Reflects an opinion.
 Cannot be shown to be true or false by
reference to the facts.
 Most of the disagreements in economics
involve normative debates.
 A normative statement can not be tested.
Dr. Mazharul Islam
23
Economics: A Social Science and
Policy Tool
 Scientific
Method
To study economic problem, economists
employ a process of theoretical investigation
that is called the scientific method. It consists
four steps:
A. Identify the question and define relevant
variables
B. Specify assumptions
C.Formulate a hypothesis
D.Test the hypothesis
Dr. Mazharul Islam
24
Economics: A Social Science and
Policy Tool
 Identify
the Question and Define Relevant
Variable.
Example: The question might be “ What is the
relationship between the price of Al-Baik and
the quantity of Al-Baik purchased?
Relevant variables of this question are ‘Price
and Quantity’.
Dr. Mazharul Islam
25
Economics: A Social Science and
Policy Tool
 Specify
Assumptions
One major category of assumptions is the
‘other things constant assumption’. It is
called ‘ceteris paribus’ assumption. To
isolate the relation between ‘price and
quantity’, we assume that there are no
changes in other relevant variables such
as income, the price of McDonald, the
price of KFC, the price of chicken etc.
Dr. Mazharul Islam
26
Economics: A Social Science and
Policy Tool
 Formulate
a hypothesis
Hypothesis
refers
a
theory
about
relationships among key variables. It
means a theory about how key variables
relate to each other. From our example,
what will happen to the quantity
purchased of Al-Baik if the price of Al-Baik
goes up.
Dr. Mazharul Islam
27
Economics: A Social Science and
Policy Tool
 Test
the hypothesis
By comparing its predictions with
evidence, we test the validity of a
hypothesis. The test lead us either to (1)
Reject the hypothesis or (2) except the
hypothesis.
Dr. Mazharul Islam
28
Economics: A Social Science and
Policy Tool
 Economics
as Policy Tool
Economics is a way of approaching
problems in all aspects of our lives. Three
broad areas are
 Personal economic policy
 Business economic policy
 Government economic policy
Dr. Mazharul Islam
29
After studying this appendix, you
will be able to:
Make and interpret a scatter diagram.
Identify linear and nonlinear relationships and
relationships that have a maximum and a
minimum.
Define and calculate the slope of a line.
Dr. Mazharul Islam
30
After studying this appendix, you
will be able to:
Scatter
Diagrams
A
scatter diagram plots the value of one variable
against the value of another variable for a number
of different values of each variable.
A
scatter diagram reveals whether a relationship
exists between the two variables.
Dr. Mazharul Islam
31
After studying this appendix, you
will be able to:
Figure A1.4(a) is a scatter
diagram of income and
expenditure, on average,
during a ten-year period.
Point A shows that in 2006,
income was $33,000 and
expenditure was $31,000.
The graph shows that as
income increases, so does
expenditure, and the
relationship is a close one.
Dr. Mazharul Islam
32
After studying this appendix, you
will be able to:
A relationship between two variables that move in
same directions is called a positive relationship.
Dr. Mazharul Islam
33
After studying this appendix, you
will be able to:
A relationship between two variables that move in
opposite directions is called a negative
relationship or an inverse relationship
Dr. Mazharul Islam
34
After studying this appendix, you
will be able to:
The relationship that have a Maximum or a
Minimum
Dr. Mazharul Islam
35
After studying this appendix, you
will be able to:
The
slope of a relationship is the change in the
value of the variable measured on the y-axis
divided by the change in the value of the
variable measured on the x-axis.
We use the Greek letter  (capital delta) to
represent “change in.”
So y means the change in the value of the
variable measured on the y-axis and x means
the change in the value of the variable measured
on the x-axis.
Slope equals y/x.
Dr. Mazharul Islam
36
After studying this appendix, you
will be able to:
Dr. Mazharul Islam
37
After studying this appendix, you
will be able to:
The Slope of a Curved Line:
Dr. Mazharul Islam
38
Now it’s over for today. Do you
have any question?
Dr. Mazharul Islam